ECONOMIC GROWTH

FOR DEVELOPMENT
DEV7007-B
Table of Contents
Introduction:...............................................................................................................................................1
Economic Growth and Openness to Trade:..............................................................................................2
Openness to Trade:.................................................................................................................................2
Theoretical Framework:............................................................................................................................3
New Trade Theory:.................................................................................................................................4
Variables to control:...................................................................................................................................5
Growth of Population:............................................................................................................................5
Investment:..............................................................................................................................................5
Inflation and Domestic credit:...............................................................................................................5
Industry:..................................................................................................................................................5
Conclusion:..................................................................................................................................................5
 To what extent trade openness has the potential to stimulate
growth in developing countries? Critically examine using a
Theoretical framework and relevant data.

Introduction:
The modern tendency of reducing obstacles to the unrestricted movement of products, services,
labour data, capital, and ideas across international borders is known as trade openness. The long-
term objective is for social and monetary systems around the world to become more intertwined.
Both economic growth and technological advancement have benefited from international trade in
goods and services. The global economy can now profit from greater trade openness to the
widespread adoption and use of modern technology. As communication and transportation
technology have improved, new global markets for the exchange of commodities and services
appeared. The host country's economy benefits from foreign direct investment (FDI) in a number
of ways, including increased productivity, a new understanding of what it means for an economy
to be efficient, and the fostering of international relations (Arrow, 2019).
Over the past 50 years, academics and decision-makers have studied the connection between
greater trade openness and higher living standards. Although there is a growing need of research
on the topic, the conclusions have not yet been able to conclusively establish the nature of the
series' link. Two schools of thought—growth-led trade and trade-led growth theories—have
emerged in the literature to help us make sense of these relationships. Most academics concur that
greater trade flows contribute to economic growth. Through commerce, partners can profit from
one another's companies and add to the overall economy (Grossman, 2020).
Trade liberalisation and economic growth are topics covered in a lot of literature. it is not
accurate to say that more commerce raises GDP. Few issues in the evolution of economic theory
have generated as much spirited discussion as this one. We utilize data from the World Databank
to examine 71 developing nations in order to understand how trade openness affects economic
growth. In recent decades, many emerging nations have started their programs for external
economic liberalization, setting an excellent example for other nations (Hallak, 2021).
Additionally, prior research has shown that trade relations serve as informational bridges,
facilitating the transfer of technological know-how and innovative concepts. Emerging nations
may have a lot to gain by establishing trade ties with advanced, economically integrated nations.
The relational mechanisms that influence trade returns, in contrast, are highlighted in other
literature that employs structure-based models. Underdeveloped countries that are less connected
to the global trade system have a disadvantage when sending and/or receiving goods, whereas
countries with considerable connections have more negotiating leverage in international
commodity exchanges (Harrison, 2018).

Economic Growth and Openness to Trade:

In applied economics, studies on the connection between increased GDP and trade openess are
prevalent. Theoretical underpinnings of the relationship between increased GDP and trade
freedom. According to this model, trade liberalization boosts GDP growth by increasing global
competitiveness, productivity, and export earnings through technology spillovers. On the other
hand, theoretical models contend that trade openness may hinder economic growth, especially in
low-income countries. The structural traits of low-income developing countries frequently cause
trade agreements to change in a way that is harmful for these nations, according to this alternate
hypothesis (Hodge, 2020).
Therefore, trade openess and economic expansion may have complementary causes and effects.
The relationship between trade liberalization and economic growth is still not supported by strong
empirical data. There are numerous conflicting findings in the literature. While some researchers
found a strong correlation between trade openness and GDP growth, others found no correlation
at all. Furthermore, a recent study that examined this connection in 34 African countries found
that trade openness is adverse to economic growth (Lucas, 2020).

Openness to Trade:
It is amazing how many perspectives exist on South Korea's economy—some perceive it as open
and outward-looking, while others see it as heavily regulated and semi-closed. For a very long
time, economists have struggled to come up with reliable and palatable ways to assess trade
openness between nations. We are aware that openness is a complex idea in order to study
measurement. While some studies rely on readily available openness metrics, others have created
indices to evaluate variables like a country's export and import levels (Mankiw, et al., 2017).
There have been hundreds of studies on the topic, and each one has used a different metric to
determine trade openness. The second set of data examines the degree to which nations impose
trade barriers among themselves and includes measures such as average tariff rates, export taxes,
taxes on international trade, and non-tariff barrier indices (NTBs). Tariffs are a straightforward
indicator of trade limitations since they compare tariff receipts to import values. On the other
hand, the effect of tariffs on growth remains a contentious issue. Nearly all of these indicators are
largely disregarded in the empirical literature due to a lack of sufficient data and the prevalence of
measurement mistakes (Pritchett, 2018).
Along with the customary units of measurement, there is also the exchange rate. In this industry,
it is common practise to gauge the severity of trade prohibitions using the black market premium.
Despite this, the black market premium is considered to be a reasonable proxy for the overall
degree of external sector distortions rather than a measure of trade policy due to its significant
link with a number of undesirable policies such as high inflation or a high degree of corruption.
Finally, a variety of trade-oriented policies have been devised to investigate how openness affects
development. A country is considered closed if it meets any of the following five criteria: average
tariff rates of 40% or more, NTBs covering 40% or more, a socialist economy, a black-market
exchange rate depreciated by 20% or more relative to the official exchange rate on average, and a
state monopoly on major exports. This index is not frequently used due to its limited breadth.
Without assessing the volume of global commerce, it just categorizes countries as being either
fully open to trade or completely closed (Pritchett, 2018).
Theoretical Framework:
The developing nations of the world have made amazing progress in recent decades. In Asia and
Latin America, millions of people have been lifted out of terrible poverty, while numerous
entrepreneurs have amassed enormous fortunes and established businesses that have changed the
game. Free trade, many economists believe, was and continues to be a significant role, despite the
fact that it is impossible to identify a single element that caused this expansion (Pritchett, 2018).
The possible gains and disadvantages of trade for economies have been addressed by the theory
of global trade. Regulating how commerce affects development is still mostly unregulated.
Technology advancement is the primary long-term driver of economic growth, according to
conventional growth theories. By investing their domestic savings, economically isolated nations
may integrate into the world economy. Because of this, rapid progress forces people to make
short-term financial sacrifices in order to increase their long-term prosperity. Contrarily, trade can
lead to capital inflows and knowledge spillovers, both of which help an economy become more
technologically advanced (Mankiw, et al., 2017).
When compared to earlier theories, the new trade theory has made a number of conclusions about
this matter, including that global trade fosters economic expansion and technological
advancement, and that this encouragement is brought on by elements like economies of scale,
comparative advantage, and knowledge spillover. Due to the increased allocation efficiency made
possible by global trade, which raises the entire production potential frontier, comparative
advantage arises. Long-term economic gains will accrue to every nation. We will use the
Heckscher-Ohlin model to construct a more plausible representation (Rodrik, 2020).

Figure 1: Heckscher-Ohlin model (Lucas, 2020)

According to Figure 1, both nations may now benefit by consuming off of a new production
potential curve, which combines their maximum capacity as a result of trade and nations
producing on the basis of their competitive advantages. This is indisputable proof of the benefits
of global trade. Understanding the link between trade liberalization and economic growth is
another area in which new growth theory has made significant strides. If R&D is the driving force
behind economic expansion, commerce enables a nation to benefit from the technological
advancement of its trading partners. Trade is essential to the development of poor nations'
economies (Rodrik, 2020).
As a result of trade liberalisation or free trade, the catch-up effect, also known as convergence
theory, describes what happens when states permit money to flow freely among themselves. This
increases the likelihood that knowledge and technology will spread throughout the world. Due to
the spread of new technologies and the energizing effects of the outside world, international trade
is a critical engine of economic growth. The role of information acquisition and technical
development in economic growth was further illustrated using trade endogenous growth models.
Additionally, businesses can get access to bigger markets, enhancing the benefits for innovation
and supporting R&D expansion. In addition, trade enables developing nations to obtain the
intermediate and investment commodities required for the second stage of their manufacturing
processes. Trade policies affect investment, which in turn affects economic growth, either directly
or indirectly (Rodrik, 2020).
Trade boosts business productivity. Healthy competition should result in improved overall
productivity in the industry if businesses' ambition to gain a competitive advantage drives them to
look for and implement new working methods. Competition from abroad encourages innovation
and productivity at home. Because of this, economies in nations with inefficient industrial
systems might be forced to shift resources and endowment components from outdated,
unproductive sectors to more modern, productive ones (Young, 2017).

New Trade Theory:

A new school of thought known as new trade theory emerged around the turn of the century
(NTT). The notion that economies of scale and network effects in global trade benefit
multinational firms emerged. This deviated from the more conventional concept of comparative
advantage and gave rise to fresh criticisms of complete trade liberalization. NTT asserts that due
to the advantages of entering the market first, small businesses in emerging economies have little
chance of competing with large multinational corporations. This suggests that a small number of
wealthy nations control a disproportionate amount of global markets, creating a monopoly
(Young, 2019).
There has been a lot of discussion over whether trade liberalization has a good influence as a
result of new statistics. Even if the WTO has made progress in this direction and many
economists support trade openness, protectionism and similar measures should be tailored to a
particular nation or industry. As a result of the inclusion of factors like political environment,
labor standards, and subsidies in new trade theory, past WTO discussions have been given new
consideration (Vlastou, 2019).
Additionally, a critique of Paul Krugman's Nobel Prize was provided, and it was shown that the
recently created models had been very helpful in understanding new trade patterns. It is envisaged
that it will be extended to developing nations, who commonly assert that highly competitive
strong industries in developed countries make it impossible for expanding businesses to compete.
Some contend that emerging nations should continue to integrate more deeply into international
markets. Although Ukraine has political problems, the administration would gain from
implementing several contemporary trade theory ideas. guidelines for starting the long-term
growth journey (Yanikkaya, 2021).

Variables to control:
Growth of Population:
Economic theory does not provide clear guidelines for policymakers on how to promote
economic growth in the face of an increasing population. While proponents of the endogenous
growth hypothesis claim that more population results in greater technical advances, the
conventional economic theory asserts that a population that is expanding quickly may have a
negative effect on GDP per capita. This suggests that a growing population could either help or
hurt the economy (Young, 2017).

Investment:
Domestic investments have the potential to increase overall economic productivity by enhancing
both the quality and quantity of the human capital in the economy, hence they were included in
the investments variable in this research. It is anticipated that growth and investment would have
a favorable, statistically significant relationship (Acemoglu, 2018).

Inflation and Domestic credit:

Even while inflation is used as a gauge of macroeconomic stability, it is believed to have a
negative impact on GDP since it slows down investment growth, savings, and production growth.
The domestic credit provided by the banking industry as a percentage of GDP reflects the
financial support provided to the private sector as an engine of economic growth. It would stand
to reason that improving a nation's financial system will increase its GDP (Arrow, 2019).

Industry:
To evaluate developing nations' technological prowess and level of industrialization, look at their
"industrial share" of GDP. Industrial value-added serves as an economic development accelerator
when combined with factors related to international trade (Yanikkaya, 2021).

Conclusion:
Over the past 20 years, developing countries have received several policy proposals, many of
which have included trade liberalisation. The most significant benefit of greater trade openness is
claimed to be economic growth since it encourages effective resource allocation, raises
competitiveness in domestic and global markets, and permits the transfer of knowledge and
technology across nations. There is also proof that openness and economic progress do not always
go hand in hand. We found the opposite to be true for emerging nations in Sub-Saharan Africa,
despite the fact that the positive openness-growth nexus has been shown to be true for many
developing nations, including those in East Asia and Latin America. As a result, I think that a
variety of factors, including location, level of development, macroeconomic stability, and the
sturdiness of the financial sector and domestic institutions, which account for the suggested
heterogeneity across countries, determine the impact of trade liberalisation on economic growth.
To sum up, I found it quite difficult to discover a method that is widely accepted for measuring
the openness of international trade, as well as a deeper grasp of what openness involves, during
my research. Both of these topics have sparked a lot of debate. There is an urgent need for more
study to create a standard statistic that can incorporate and enhance the numerous existing
approaches for measuring trade openness because there are so many of them now in use. I think
utilising trade shares of GDP as the main variable in my research is one of the better possibilities
for measuring trade openness because trade outcomes are more simply defined, measured, and
available via objective data sources.

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